Schiff w/ La Roche: The Fed Should’ve Hiked

Last week, Peter joined Julia La Roche to discuss the Fed’s latest antics after Jerome Powell announced that rates will be held steady for at least another FOMC meeting cycle. Peter responds, warns that the consequences of the Fed’s inaction will be higher inflation, a weaker dollar, and a reassessment of what people consider real wealth. Along with Julia, he walks through rising national debt, the impossible choices facing the Federal Reserve, and why gold will preserve purchasing power for inflation-weary consumers.

He begins with the scale of the problem — the exploding national debt and the risk that a recession will make it much worse:

The national debt has increased by 2.8 trillion just in the last 14 months since Donald Trump’s been president. But if you look at the trajectory of the debt and what’s likely to happen in the coming years, I think we might actually hit 50 trillion before Trump finishes his term. So that’d be about 11 trillion more in debt over the next three years. But I think what could drive the debt to that level would be a recession, which I think we could be on the cusp of an official recession that will reduce government tax revenue. And increase expenditures.

He warns that the Fed is trapped: tighten enough to control inflation and you risk a financial collapse; keep policy loose and inflation rages. That is the rock-and-hard-place decision central bankers face:

That’s exactly the position there between a rock and a hard place. Because if they raise rates and tighten monetary policy, which would also mean going back to quantitative tightening, if they were to raise rates by a degree that would actually be sufficient to rein in this inflation that they let loose, the rate would be so high that our debt-laden economy would completely implode. And we have a much worse financial crisis than the one we had in 2008. I mean, it wouldn’t even be close to how bad it would be.

He paints a grim outlook for prices, arguing that once inflation gets loose politically it’s nearly impossible to bring under control without severe pain — which policymakers avoid:

As far as the eye can see, inflation is going to go into the double digits. And who knows? It may even go into the triple digits. But it’s going to become a huge problem because the Fed can’t do anything about it politically. Now, they could if they were willing to take the hit. Donald Trump talks about how he thinks we should have some short-term pain for long-term gain when it comes to paying high gas prices to win a war against Iran.

Peter is clear that the Fed will not choose the hard medicine, and because of that we should expect a different kind of crisis than 2008 — one rooted in the dollar and sovereign credit, coupled with rampant inflation:

Well, it would be worse than 2008 if the Fed did the right thing. But because it won’t do the right thing, because it knows that doing so would create a worse financial crisis than 2008, it won’t. And so what’s going to happen is not going to look like 2008. It’s going to be a different type of crisis. I think it’s going to be a U.S. dollar crisis, a sovereign debt crisis, and you’re going to have very high inflation.

To make the threat concrete, he compares stocks to gold, showing how nominal gains mask real losses when measured against sound money. That ratio, he says, points to a long-term shift in where value is stored:

If you look at the value of the U.S. stock market today, the Dow is worth less than 10 ounces of gold. Now, in 1999, the Dow was worth more than 40 ounces of gold. So you’re talking about a 75 percent decline in the value of stocks, even though the nominal price of stocks has gone up almost fivefold. But in real terms, the stocks have lost value. And that trend is going to accelerate in the years ahead.

As the interview wraps, Peter stresses a hopeful outcome: a crisis could force Americans to reject entitlement illusions and return to the free market ideals that built prosperity:

I am still hopeful that at the other end of this, at the other side of this crisis, we can emerge as a stronger, freer nation, that instead of, you know, the crisis being a catalyst to socialism, it’s a catalyst to reject socialism and embrace the free market principles that made America great in the first place. That’s what I’m hoping. You know, I don’t think we’re going to embrace those principles until there is a crisis. I don’t think we’re going to give up on all the government freebies until we realize that it was all a scam and everybody is broke who relied on government promises.